Unformatted text preview: the call price. The firm is more likely to call the issue at low interest rates, so the option is valuable. At higher interest rates the firm is less likely to call and this option loses value. The prices converge for high interest rates. A graphical representation is shown in Figure 14.4, page 463. 12. The expectations theory of the term structure of interest rates states that A. forward rates are determined by investors' expectations of future interest rates. B. forward rates exceed the expected future interest rates. C. yields on long‐ and short‐maturity bonds are determined by the supply and demand for the securities. D. all of the above. E. none of the above. The forward rate equals the market consensus expectation of future short interest rates. 13. Given the time to maturity, the duration of a zero‐coupon bond is higher when the discount rate is A. higher. B. lower. C. equal to the risk free rate. D. The bond's duration is independent of the discount rate. E. none of the above. 5 The duration of a zero‐coupon bond is equal to the maturity of the bond. 14. Which of the following bonds has the longest duration? A. An 8‐year maturity, 0% coupon bond. B. An 8‐year maturity, 5% coupon bond. C. A 10‐year maturity, 5% coupon bond. D. A 10‐year maturity, 0% coupon bond. E. Cannot tell from the information given. The longer the maturity and the lower the coupon, the greater the duration 15. Some of the problems with immunization are A. duration assumes that the yield curve is flat. B. duration assumes that if shifts in the yield curve occur, these shifts are parallel. C. immunization is valid for one interest rate change only. D. durations and horizon dates change by the same amounts with the passage of time. E. A, B, and C. Durations and horizon dates change with the passage of time, but not by the same amounts. 16. A covered call position is A. the simultaneous purchase of the call and the underlying asset. B. the purchase of a share of stock with a simultaneous sale of a put on that stock. C. the short sale of a share of stock with a simultaneous sale of a call on that stock. D. the purchase of a share of stock with a simultaneous sale of a call on that stock. E. the simultaneous purchase of a call and sale of a put on the sa...
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- Spring '14
- Interest Rates, risk‐free rate